The Emergence of Industry Clusters. Theory & Evidence - Essay Example

?The Emergence of Industry Clusters Theory and Evidence Table of Contents Introduction 3 Key Facts of the Industry Clusters 4 Theories on the Origin and Emergence of Industry Clusters 7 Policy or Strategy Recommendations 10 Conclusion 14 References 16 Bibliography 18 Introduction The industry clusters act as a source of local modernisation along with improvement towards geographic attention of various business organisations, industrial firms and related trade institutions that include standard agencies and trading organisations among others (Norton, n.d.).It has been prominent that an industrial cluster is a form of network that takes place within a geographical position in which the immediacy of the firms ensures certain forms of unity along with raising the frequency and the impact of the interactions among the firms. According to the researchers, an industry cluster may be defined as a geographical adjacent group of interrelated industrial firms and connected institutions which is linked by unity and harmony (Tan, 2005). In an organisational form, clusters offer more flexibility to the industrial firms in the ever- changing industrial environment. In other words, the extent along with the nature of link between the customers, the suppliers and the competitors determine the various advantages of industrial cluster with respect to industrial structure. The emergence of industry clusters has made an exceptional mark as well as caused a significant variation in regional financial performance of the United States and Germany (Delgado & et. al., 2010). Through the occurrence of pioneering clusters of the companies and industries such as semiconductor industry of Silicon Valley, automobile industry of Detroit and German Laser industry, the researchers observed that the above mentioned industrial units attained strong financial performance due to the presence of modernised clusters. Thus, it can be stated that during the emergence of industry clusters lie a significant as well as mention worthy effect upon attaining strong and well organised financial performance which is performed by the industrial units such as semiconductor industry of Silicon Valley, automobile industry of Detroit and German Laser industry. In the paper, the origin, the enlargement, the formation and the progression of industry clusters such as semiconductor industry of Silicon Valley, automobile industry of Detroit and German Laser industry are elaborately discussed. Supportive theories and evidences along with various prescribed policy recommendations regarding the emergence and impact of industry clusters will also be taken into concern in the discussion of this paper. Key Facts of the Industry Clusters There are various factors that are associated with industry clusters that encompass a favourable business situation which is an elementary requirement for activating industrial agglomeration (Klepper, 2009). The factors that include steady macroeconomic atmosphere, government institutional structure, enhanced legal system, and modernised technologies are regarded as a few of the encouraging factors for industrial clustering. The factors that include deficiency of low labour cost, trained labours and professionals, scarcity of advanced physical structure such as roads, legalised actions and legislations and lack of improved logistics, production methods and innovative business operations eventually act as an obstacle towards industrial clustering (Klepper, 2009). Along with the encouraging factors, there also lie certain major elements that act as a crucial obstacle towards industrial clustering. It has been identified that the two most inspiring and remarkable industry clusters of the United States are especially the semiconductor industry in Silicon Valley and the automobile industry in Detroit (Klepper, 2009). In the early days of semiconductor industry i.e. 1950, Silicon Valley enjoyed maximum financial leverage due to the contribution of its semiconductor industry. However, in the next 30 years, nearly 100 semiconductor companies entered into Silicon Valley and its financial progression enlarged rapidly (Klepper, 2009). In this connection, Detroit’s growth was also identified to be more striking as compared to the Silicon Valley’s semiconductor industry. At the initial stage of the automobile industry, over 100 automobile firms entered into the Detroit area and eventually made it stronger to attain greater financial leverage than the Silicon Valley. At the same time, the other incredible industry cluster, particularly in Germany i.e. German Laser Industry also enjoyed maximum financial leverage while executing its business operations (Buenstorf, 2006). The industry made a flourishing entry into a skill based industry i.e. laser industry with pioneering capabilities that eventually enabled the industry to compete with other similar based industry entrants as a competitor. It has been observed that the full force of German laser source manufacturers started to execute their business operations actively between the year 1964 and 2003 with a sum total of 143 firms (Buenstorf & Geissler, 2008). While executing the business operations, it has also been noted that a few of the entrants who were dynamically involved in the laser industry mainly emerged from the diversification of the associated industry or performed earlier dynamically as importers of overseas made lasers. Moreover, the entrants also emerged from the spinoffs of current and active laser firms, entrepreneur organisations coming from universities or communal investigation institutes and other start-up organisations that do not possess any relevant ideas based upon the laser industry. There lie a number of key facts that arguably need to be considered in case of the industry clusters formed in semiconductor industry of Silicon Valley, automobile industry of Detroit and German Laser industry which ultimately provide a greater understanding regarding the significance of the emergence of industry clusters. One of the important key facts in this connection lies in no regional natural advantage (Klepper, 2009). There lies no obvious regional natural advantage that underlie clustering which refers that the industry clusters have no such ultimate connection with regional features. The other key piece of evidence lies in the reality that both Detroit and Silicon Valley possessed early performer advantage. Their performance excellence lies in the piece of evidence that especially “Fairchild Semiconductor” in Silicon Valley produced ‘transistors’ before the introduction of ‘integrated circuits’ (IC) and “Olds Motor Works” in Detroit formed mechanical instruments before the introduction of automobiles (Klepper, 2009). These particular inspiring as well as remarkable piece of information eventually justifies that both Silicon Valley and Detroit were early excellent performers in their respective industrial fields. The other major key fact regarding the industry clusters lie in the clusters possessing the various firms above of its average size (Klepper, 2009). From the year 1950 to 1980, almost 100 semiconductor firms penetrated into Silicon Valley that ultimately accounted for 43% of the output of the industry and during the first 30 years of the automobile industry, over 100 automobile firms entered into the Detroit area possessing a combined market share of 65%. In this connection, the key fact of indigenous entrants also comprised as a major concern for the industry clusters. It has been noted that a majority of the firms in the two clusters were spinoffs. Nearly 80% of the ‘integrated circuit’ (IC) participants in the Silicon Valley were spinoffs (Klepper, 2009). The related model was also found in Detroit. “Olds Motor Works” which was a successful engine manufacturer, also generated the most spinoffs in the industry. Similarly, the German Laser Industry was also examined to execute the conception of spinoffs while executing its business operations along with the semiconductor industry in the Silicon Valley and the automobile industry in the Detroit region (Klepper, 2009). However, it can be stated that nearly all the participants particularly performing in the Silicon Valley, the Detroit area and in Germany became industry leaders in their respective field of industries duly pursued the notion of spinoffs. Theories on the Origin and Emergence of Industry Clusters The assumption of spinoffs is recognised to be one of the most inspiring as well as noteworthy theories that had a helpful effect towards the origin and the emergence of clusters of various industrial firms. The idea of spinoff acts as a device that might help towards the occurrence of cluster of various industries that include semiconductor industry in Silicon Valley, automobile industry in Detroit region and laser industry in Germany among others (Klepper, 2011). With the better performance of a particular company or an industry, important lessons can be learnt by the employees’ about how to manage an industrial organisation, which is often regarded as spinoff. The profitability of a potential spinoff would depend upon the lessons that are learnt by its employee-founder and the employees’ capability in order to manage his/her individual firm. However, the major role that is played by the spinoff process in industrial clustering suggests that the organisational imitation and inheritance are the key features to their clustering (Klepper, 2011). The evidence also specifies that the spinoff procedure worked more rigorously in Detroit and Silicon Valley, raising their effectiveness towards certain kinds of influence of regional conditions on entry. According to the various principles of spinoff, industry clustering in a country commences mainly with a single industrial unit that include Silicon Valley’s semiconductor industry, “Olds Mobile Works” in case of Detroit’s automotive industry and other related industries in different regions. Its initial influence eventually attracts the other regional producers (Costa & Baptista, 2011). However, the successive development of the regional cluster is endorsed to be an effective procedure in which the serving industrial firms involuntarily generate the theory of spinoff. There are certain considerable information that decorated the crucial role of spinoffs towards the formation as well as the advancement of well known industry clusters that include automobile producers in the Detroit area, semiconductor producers in the Silicon Valley and the laser producers in Germany. The semiconductors, automobile and laser industrial clusters generated spinoffs at a higher rate and it was duly identified that the publicly operating firms based on Silicon Valley and Massachusetts which are considered as the main centres of high-tech industrial firms in the United States, eventually generated more spinoff companies in order to gain maximum financial leverage (Klepper, 2009). However, the practices of spinoff remarkably entered into the main centres of the industrial firms such as Detroit and Silicon Valley and the joint market share of spinoffs exceeded the pre-spinoff market share suggesting that the theory of spinoff played a chief role towards the formation as well as the advancement of well known industrial clusters. In this connection, the factor of industry agglomeration is recognised as one of the prevailing characteristics that are mainly linked with the industrial growth (Costa & Baptista, 2011). However, along with the idea or theory of spinoff, the factor of industry agglomeration also contributed towards the success of semiconductor industry in Silicon Valley, automobile industry in Detroit area and the German Laser industry to a certain extent relating with industrial clustering. The number of factors that are commonly associated with clear conception of industry agglomeration along with industrial clustering lie in the fact that certain regions may possess a few common advantages for the business units in particular industries, founding a basic ground especially for the entrants to have a cluster. The other factor lies in the fact that the production externalities through which the firms get benefited from the proximity to other firms may encourage the entrants to cluster. The financial economies related to various carrying costs as featured in ‘new economic geography models’ may cause the participants to cluster near the customers along with the suppliers belonging to their industry (Costa & Baptista, 2011). These are certain common factors that are frequently linked with industrial agglomeration and clustering. However, the various theories such as the spinoff theory, external economy theory and industrial agglomeration theory eventually have a significant effect upon the industrial cluster especially to the Silicon Valley’s semiconductor industry, Detroit region’s automotive industry and the laser industry in Germany. After emphasising upon the various theories relating with the industrial cluster, it has been noted that the theory of spinoffs along with industrial agglomeration theory played a significant role towards the above mentioned related industries. Policy or Strategy Recommendations In relation with the conception of industrial cluster along with its various theories, certain recommendations are made for the industrial firms in order to attain greater financial advancement along with maintaining superior industrial agglomeration to a certain extent. The diverse strategy recommendations for the industrial firms in lieu of industrial clustering lie in various facets such as firm heterogeneity, sources of entrants, inheritance and industrial firm location choices among others In terms of industrial firm heterogeneity factor, the industrial firms mainly differ in terms of their competence. The competence of the high-tech industries such as semiconductors, automobiles and laser industries centrally involve a firm’s capability to manage various technological changes (Klepper, 2009). The high-tech industrial firms vary in their potential to manage technological change. In lieu of this, the high-tech industrial firms must possess such capabilities in order to manage various technological changes while executing their business operations. In relation to sources of entrants, the competencies of an industrial firm are fundamentally based upon its former entry experiences. In other words, pre-entry experiences duly affect upon the performances of an industrial organisation (Klepper, 2009). In this connection, the high-tech organisations must be very much conscious regarding their pre-entry experiences while initialising their business functions. Taking in lieu the factor of inheritance, the competency of the industrial firms also lies upon their better performing spinoffs. These spinoffs are typically formed by high level employees’ and consequently spinoffs are considered to be higher performers (Klepper, 2009). In order to add a superior value particularly in the industrial clustering along with industrial agglomeration, the high tech industrial firms should work hard more towards performing enhanced spinoffs. With regard towards firm location preferences, it is very much important for the high tech industrial firms to be well aware relating towards their choices of their industrial business locations (Klepper, 2009). It is quite obvious to the fact that the economic as well as social knowledge regarding the preference of firm location contribute to a firm’s competencies. The formation and strengthening of industrial bases are one of the conditions in order to attain financial development and progression. It has been identified that even after the introduction of various related factors towards industrial agglomeration; the industrial units or firms might face stern cost competition as compared with others. In order to stay competitive, it is essential especially for the industrial units or firms to fully grab the probable benefits from ongoing regional incorporation along with upgrading its industrial structure to a modernised industrial cluster where the industrial firms conduct a broad variety of research and growth activities or collaborate to transmit knowledge and technologies. Along with the above mentioned policy recommendations, certain other recommendations are also made especially for the high tech industries such as semiconductor industry in the Silicon Valley, automobile industry in the Detroit area and the laser industry in Germany in order to attain superior monetary progression. In order to attain superior monetary progression, it is recommended for the high tech industries to pay more focus and attention towards forming as well as enhancing entrepreneurial culture within their respective industries and more positive importance upon the factors that may influence external financing that might have a significant effect upon new firm creation along with greater financial development. Along with enhancing entrepreneurial culture and paying utmost importance towards external financing, the other factor that is also recommended for the high tech industries is to work upon the factors that affects the employee mobility. Therefore, the overall policy or strategy recommendations will ultimately enhance the high tech industries such as semiconductor industry in the Silicon Valley, automobile industry in the Detroit area and the laser industry in Germany in order to attain greater financial advancement along with superior monetary progression. Conclusion It has been noted that industry clustering provides a solid ground especially to the producers of the high tech industrial firms for competitiveness along with maintaining proper and smooth inter-industrial firm relationships. In the paper, various assumptions have been discussed along with evidences especially related with the Silicon Valley’s semiconductor industry, Detroit region’s automotive industry and the laser industry in Germany. From the evidences, it is observed that the above mentioned industrial firms through initialising the theory of spinoff eventually gained maximum financial leverage. Along with the analysis of the relevant as well as appropriate theories and evidences driving the formation of industry clusters, certain policy or strategic recommendations are also made for the high-tech industries. It can be affirmed that by following the prescribed strategy or policy recommendations, the high tech industries can attain greater financial advancement along with maintaining greater industrial agglomeration to a certain extent. Apart from executing the theory of spinoff, the high tech industries also can follow other theories such as mergers and acquisitions and graph theories among others in order to attain significant financial growth and advancement in the long run. In future, the high tech industries can undergo through certain researches regarding the various theories other than theory of spinoff to achieve their financial development. After acquiring a general as well as a broad idea regarding the conception as well as the emergence of industry clusters along with relevant and associated theories with evidences, it can be stated that the factor of industrial clustering seems to be an essential constituent playing a major role in the production of various industrial firms. Thus, it can be stated that the theory of spinoff in relation to industry cluster is one of the crucial factors for attaining and enhancing financial progression along with advancement and by following the above mentioned policy or strategy recommendations, an industrial business unit or the high tech industries can attain their desired outcomes and ultimate business goals to a certain extent. References Buenstorf, G., 2006. Knowledge-Based Entrepreneurship and Technology Transfer: Evidence from the German Laser Industry. How Laser Technology Came to Germany. [Online] Available at: http://portale.unibocconi.it/wps/allegatiCTP/August2006_WP2a_15.pdf [Accessed February 06, 2012]. Buenstorf, G. & Geissler, M., 2008. The Origin of Entrants and the Geography of the German Laser Industry. The Origination and Location of Entrants into the German Laser Industry. [Online] Available at: https://papers.econ.mpg.de/evo/discussionpapers/2008-14.pdf [Accessed February 06, 2012]. Costa, C. & Baptista, R., 2011. Spinoff Location: Agglomeration vs. Organisational Reproduction- The Molds Cluster in Portugal. Theoretical Aspects. [Online] Available at: http://www2.druid.dk/conferences/viewpaper.php?id=502486&cf=47 [Accessed February 06, 2012]. Delgado, M & et. al., 2010. Clusters, Convergence and Economic Performance. Introduction. [Online] Available at: http://www.isc.hbs.edu/pdf/DPS_ClustersPerformance_08-20-10.pdf [Accessed February 06, 2012]. Klepper, S., 2009. The Origin and Growth of Industry Clusters: The Making of Silicon Valley and Detroit. Journal of Urban Economics, Vol. 67, pp. 15-32. Klepper, S., 2011. Nano-Economics, Spinoffs, and the Wealth of Regions. Small Bus Econ, Vol. 37, pp.141-154. Norton, M. G., No Date. Japan’s Eco-Towns- Industrial Clusters or Local Innovation Systems? Spread of the Cluster Model. [Online] Available at: http://journals.isss.org/index.php/proceedings51st/article/viewFile/535/232 [Accessed February 06, 2012]. Tan, J., 2005. Growth of Industry Clusters and Innovation: Lessons from Beijing Zhongguancun Science Park. Journal of Business Venturing, Vol. 21, pp.827-850. Bibliography Buenstorf, G. & Klepper, S., 2008. Heritage and Agglomeration: The Akron Tyre Cluster Revisited. The Economic Journal. Read More